You may recall Netflix’s disastrous price increase last July. To recap – Netflix was charging subscribers $9.99 for its DVD plus streaming video plan. Then they separated the plans and charged $7.99 each. For the subscriber who wanted to remain in their DVD plus streaming video plan, this amounted in about a 60% price increase. Whoa! by anyone’s standard. There was an internet backlash, they lost more subscribers than they anticipated, and their stock took a hit. In fact, their stock price has been on a downward trend since the announcement… A botched strategy and a costly one.
Netflix was initially staged and thought of as a business that cared about its customer; that wanted to get it right; and wanted to provide a very affordable value. And they were rewarded for it – in customer growth and in stock price growth. Yet, with this key change, a moment of hubris, and a large miscalculation – the brand impression begins to unravel.
In his September 18th Blog, Reed Hastings, Co-Founder and CEO, attempts to “make things right” with the customers. He argues that companies such as AOL and Borders were afraid to hurt their initial business and thus failed to innovate. Hastings on the other hand, taking a page from Clayton M. Christensen’s Innovator’s Dilemma; chose to move forward with streaming video knowing it could have a negative impact on his DVD business. Actually, not a bad strategy – considering competitor threat, by services provided by Amazon and On Demand were nipping at his DVD and streaming video markets, and Red Box at his DVD market.
His approach was to “fall on his sword, admit he made a mistake, maintain and defend his price increase, and tell us he is separating the DVD service (and creating Qwikster to provide the DVD service) from the streaming video service (Netflix), and that the two websites will not be integrated. And, he further says that this will be good for the customer as they can focus on just one thing – DVDs or streaming. To us, it is more expensive, inconvenient and limits choice and flexibility.
A brilliant plan, a devious plan or a negligent one? Time will tell how well Netflix recovers from this debacle. It seems to us, however, like corporate spin right now: A strategy gone bad (the price increase) and an attempt at a recovery (the I’m sorry for the mess up blog and here’s how it will be better – yet it really isn’t).
As small business owners, your market is too small (and hence, volatile) to make mistakes such as Netflix did. Customer defection in the small business market can have disastrous consequences. As we frequently say, sometimes what big companies teach you and the most powerful learning is what NOT to do.
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Copyright 2011 Kubica LaForest Consulting
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